Two Florida men charged with money laundering for selling bitcoins

​Two Florida men are in trouble with the law after being arrested last week for agreeing to sell thousands of dollars’ worth of bitcoins to undercover agents.

Criminal charges were announced on Thursday against 30-year-old
Michell Abner Espinoza of Miami Beach and Pascal Reid, 29, a
Canadian citizen who was living in the town of Miramar when he
was apprehended last week.

According to two arrest affidavits out of the Miami Beach Police
Department, both men had independently sold hundreds of dollars’
worth of the digital cryptocurrency to undercover officers since
last December, but were only taken into custody on Thursday,
February 6 after they each agreed to make in-person transactions
involving the transfer of thousands of dollars’ worth of
bitcoins.

Both men have each been charged with one count of operating an
unlicensed money service business, laundering between $300 and
$20,000, and laundering currency valued at more than $20,000.

Brian Krebs, a security researcher and journalist who first
broke the story, said the arrests likely mark
the first time that state law has been used by investigators to
go after individuals linked to the alternative currency, which
exists only in a digital realm and allows for near-perfect
anonymity.

The "arrests may be the first state prosecutions involving
the use of Bitcoins in money laundering operations,”
Miami-Dade State Attorney Katherine Fernandez Rundle admitted in
a statement issued after the arrests.

Fernandez Rundle said that in both cases, undercover officers
working for the Miami Beach PD and the local office of the United
States Secret Service's Electronic Crimes Task Force sought out
“individuals engaged in high volume Bitcoin activity.”
According to the affidavits, however, both Espinoza and Reid made
merely pennies on the dollar by offering curious investors a
unique way of purchasing bitcoin in person for a slight fee.

Investigators reportedly set their sights on Espinoza and Reid
after coming across their profiles on localbitcoins.com, a
website where individuals can arrange to meet face-to-face with
other bitcoin enthusiasts in order to buy and sell the
cryptocurrency, currently valued at just under $700 each.

Espinoza, prosecutors allege, arranged such a deal with an
undercover agent in early December in which that officer paid
$500 for 0.403 BTC, in turn generating a profit of around $83.67
for the seller. Investigators then arranged for a second
transaction to occur days later, that time purchasing 1 BTC for
$1,000 and earning Espinoza around $167.56 through fees as a
result.

Investigators then checked to see if Espinoza’s name appeared on
the Florida Office of Financial Regulation or the United States
Treasury Department’s Financial Crimes Enforcement Network
(FINCEN) databases to determine if he was registered as a money
service business as required by both state and federal law. But
when those queries failed to return a positive result, the
investigators arranged for further transactions in order to net
harsher charges against Espinoza. After another transaction
occurred in late January worth $500, the undercover agent said he
wanted to buy $30,000 worth of bitcoin “to be used for an
illicit transaction concerning credit card fraud,” according
to the affidavit.

“During the meeting, conversation ensued describing that the
bitcoins were to be used to purchase a new batch of credit card
numbers from a recent data breach,” the official report
says. When Espinoza agreed to participate in the deal, he was
taken into custody.

Only miles away, investigators were operating a near-identical
sting. A December 10, 2013 deal involving Reid and a special
agent ended with the undercover officer paying $600 for 0.512
bitcoin, netting a $97.83 fee for the seller. By the end of
January, Reid had received $1,000 for another undercover
transaction and made plans to do a bigger deal. Again, though,
the undercover agent claimed the bitcoins being transferred would
be used to purchase illegally obtained credit card numbers, this
time from the batch compromised late last year in the
high-profile breach against American retailer Target. Reid agreed
to sell $30,000 worth of bitcoins to the officer and was shortly
after taken into custody.

Nicholas Weaver, a researcher at the International Computer
Science Institute (ICSI) and the University of California,
Berkeley, told Krebs that the latest blows to the bitcoin
community come on the heels of other recent incidents in which
similar websites that facilitate transfers and exchanges have
been hit hard by authorities. Unlike those events, however, the
arrests out of Florida involve action being taken on a state
level, and not federally, for the first time ever.

“The biggest problem that bitcoin faces is actually
self-imposed, because it’s always hard to buy bitcoins,”
Weaver said. “The reason is that bitcoin transactions are
irreversible, and therefore any purchase of bitcoins must be made
with something irreversible — namely cash. And that means you
either have to wait several days for the wire transfer or bank
transfer to go through, or if you want to buy them quickly you
pay with cash through a site like localbitcoins.com.”

“I’d expect many more state cases like this one because it
will act to strangle the lifeblood of the online dark
markets” like the Silk Road, Weaver said. “If you want a
significant amount of anonymous bitcoins, right now this
community is about the only mechanism still available.”

Krebs opined that “prosecutions like these could shut down
one of the last remaining avenues for purchasing bitcoins
anonymously.”

Another bitcoin website, BitInstant, shut down last month after
its CEO was arrested for money laundering in New York.
Then last week, bitcoin exchange MtGox announced that all
transfer out of the site had spontaneously been put on hold.
Meanwhile, Ross William Ulbricht — the alleged mastermind behind
the Silk Road underground e-marketplace, was charged last week with one count of narcotics
conspiracy, one count of conspiracy to commit computer hacking,
one count of money laundering conspiracy, and one count of
engaging in a continuing criminal enterprise due to his
involvement with that site.